So I just had a thought of how they could do the Hobbit-to-LOTR transition. At the beginning of the first Hobbit movie a young Frodo (Elijah looks perpetually young so he'll be fine) sneaks "the Red Book" out of Bilbo's study and starts reading it bringing us into the world of The Hobbit adventure. Maybe we see Frodo reading it a few more times between then and the end of the 2nd movie. But the end of the second movie should come out of "The Hobbit" story to show Frodo finishing reading The Hobbit in the Red Book while sitting under a tree, effectively ending his narraration - and the camera pans out and Frodo hears Gandalf's singing - and we realize that the famous opening shot of Fellowship of Frodo reading under a tree was actually him reading The Hobbit?